Q3 2022 Outbrain Inc Earnings Call
[music].
Okay.
Yeah.
Good morning.
And welcome all bring incorporated third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
After the session will follow the formal presentation. As a reminder, this conference is being recorded I would like to turn the call over to your host Anthony Ramos.
Sure.
You may now begin.
Good morning, and thank you for joining us on today's conference call to discuss <unk> third quarter 2023 result.
Joining me on the call today, we have our French co founder and co CEO Karankawa co CEO , David Kaufman and CFO , Jason can be out there.
During this conference call management will make forward looking statements based on current expectations and assumptions.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward looking statements each.
These risk factors are discussed in detail in our Form 10-K filed for the year ended December 31, 2021 as updated in our Form 10-Q for the quarter ended June 32022, and in subsequent reports filed with the Securities and Exchange Commission.
Forward looking statements speak only as of the cause of original date, and we do not undertake any duty to update any such statements.
Today's presentation also includes references to non-GAAP financial measures you should refer to the information contained in the company's third quarter earnings release for Definitional information and reconciliation of non-GAAP measures.
Terrible GAAP financial measures.
Our earnings release can be found on our IR website investors that outbreak dot com under the news and events section.
Let me turn the call over to David.
Thank you Anthony.
We are pleased to report that we exceeded the high end of the guidance. We provided for Q3, both for extra gross profit and adjusted EBITDA.
We are raising our guidance for the full calendar year 2022.
We are encouraged by our tremendous momentum and significant market share gains with premium publishers and by the fact that we are continuously broadening our value proposition for enterprise brand and performance advertisers, reaching over 1 billion unique users on the open web.
At the same time, we are driving business efficiencies through consolidation of activities in lower cost geographies acceleration of automation and strict cost control.
In July we implemented the head count reduction process is the continuation of cost reduction steps, we started taking already in March.
Total we took our annual cash cost down by approximately $60 million.
Our original 2022 plan.
Let me start with the supply side of our marketplace.
As mentioned, we migrated some of the largest most premium publishers to.
So the I'll bring marketplace, including the global Daily Mail group properties.
This new in the U S and many others.
We also renewed deals with many publishers, including Meredith and political risk.
Highly strategic large supply partners.
Due to the major wins, we've been recording since the beginning of the year.
And they enabled us to experience double digit growth.
AD impressions year over year.
Resulting in our highest level of impressions ever there.
We're very excited by the addition of these partners and believe that our leadership position among the world's most premium publishers is stronger than ever.
Wanting to similar web data for example, in the U S and Israel.
Exclusive partner.
Four out of the top five news publisher in Germany. It is six out of the top 10 and in trends. It is eight out of the top 10.
And as we expand with more partnership we're also deepening our impact by driving demand not just to the seed where we reached close to 60% smart logic adoption in desktop and over 80% adoption in mobile, but also through mid article placements known for higher brand awareness and your ability.
And therefore attractive to large enterprises brand advertisers.
That's a data point, we have currently more than 100 had a billing integrations with publishers and continue to expand it with our thousands of publishers.
Let's move to the demand side.
As we discussed last quarter.
<unk> supply winds coincide with general softness on the advertising side, which is reflected mostly in cost per click with TPC.
Our diverse demand mix of enterprise brand and performance advertisers has provided some stability as we see outcome driven performance, Brian I mean more revenues in Q3, which is keeping our marketplace at close to 100% fill rate.
Pricing in our marketplace remains the current headwind given the macroeconomic situation.
Choose to me.
GPC has declined more than 20% versus the same period last year.
<unk> the unfavorable impact of foreign exchange.
This decline was partially offset with an RPM level two continuous click through rate algorithmic improvement.
In terms of geographies with.
We continue to see more headwinds in Europe , including on a constant currency basis.
In terms of segment, although our advertiser base is diversified we've seen weakness in automotive and finance.
Trends in travel entertainment and <unk> had been stable to positive.
To sum it up we.
We continue to focus on our core and execute tightly and strategically on key priorities.
On the supply side, we built mass six high quality exclusive open web supply for a multiyear period and on the demand side, we are expanding beyond our strong performance business to more brand budgets.
Therefore, we believe we are well positioned for medium term and long term growth, which depends mostly on our ability to execute and gain incremental share of wallet with advertising.
On the financial front, we are pleased that we exceeded the high end of our guidance for Q3, and we are moving cautiously on any expenses to ensure that we act responsibly in the current environment.
Focused on profitability for 2020 with that I will.
Now turn it over to you Ron.
Thanks, David.
Q3 was formally launched Keystone at an event with over 40 tough global pulp church responses have been very positive and we are now in the implementation phase with three additional publishers will join the Ford design partners that we previously mentioned.
It is clear that revenue diversification is one of the top priorities for many of the best publishers around the world and it is clear that they are lacking the technology needed to enable various adverse revenue growth at scale.
Many publishers are adding paywalls registrations ecommerce newsletters video et cetera.
We are also seeing and feeling that as consumers of content that news.
Today, most publishers will make manual decisions on how to carve up the real estate.
Prompt registered sidebar box through video or navigation box E Commerce offers.
Emmanuel real estate Susan's. Her then typically shown to large swaps of users without personalization or optimization.
Keystone is a technology platform that helps make automated personalized decisions designed to help grow the various business kpis by tailoring definitely content offers.
Yeah.
Keystone Leverages significant technologies and algorithms from <unk> core advertiser and publisher product kind of deals.
Leveraging our publisher sales teams and publisher relationships and our go to market.
Our design partners have been reporting to US a 30 plus percent improvement of user engagement, where are they as implemented keystone as compared to their prior baseline and the list of their business Kpis for these Keystone placements.
So while Keystone isn't it.
Infancy, we're encouraged with the early excitement from publishers that joined the September launch and from the results reported by our design partners. So far.
I'm pleased that we are staying true to our core business and we see tremendous growth opportunities in it.
Whether it's through Keystone mid article brand placement video intelligence or our header bidding partners such as David mentioned, we continue to deepen the value our brand creates as a strategic partner to some of the world's media owners and brands.
Now on to Jason Kim our CFO to discuss the financials.
Thank you Ron as David mentioned, despite steeper than expected FX headwinds on our top line, we beat our Q3 guidance for both gross profit and adjusted EBITDA revenue was approximately 229 million a decrease of 3% year over year, something currency basis, 9% on an as reported basis the.
The decrease year over year is driven by lower yield owing largely to the headwind.
Demand affecting our industry.
These headwinds were partially offset by growing our supply from winning new quality long term partnerships.
Pending our Adam's question I think the rate on existing partnerships.
Adding new media partners in the quarter contributed 11 percentage point spread.
$28 million of revenue growth year over year, and our net revenue retention was 81%, reflecting the impact of the demand environment, reducing monetization levels on our platform.
Net revenue retention rate for Q3 reflected the net positive growth about impressions as well as improvements like Youre right.
And then offset by the lower CPC on the demand side that David spoke to as well as the FX headwind.
Under 60% of our business outside the U S.
Gross profit was $53 million, a decrease of 20% year over year on a constant currency basis and 23% as reported.
As we noted last quarter, a steeper decline of ex Tac gross profit year over year versus revenue was driven by several factors.
An unfavorable mix of revenue to lower performance on certain media partners driven in part by the demand we're seeing.
Three the impact of Onboarding, and optimizing significant new supply partners, which is challenged by the weaker than normal demand pattern.
We expect to grow out of this headwind in the coming quarters, assuming no further deterioration in the macro environment.
Moving to other cost of revenue, which increased approximately $3 million year over year, driven by our investments to increase service capacity in order to facilitate yield growth for algorithmic optimization improvement efforts.
Areas have been large growth accelerators in recent years.
Our belief is that when demand stabilizes then recovers we will be positioned to return to revenue growth in technology and product improvement.
Generate operating leverage on these investments.
Operating expenses decreased approximately $17 $7 million year over year to $49 million in the third quarter.
Constantly $16 5 million of the decrease of nonrecurring that was triggered by our IPO as it relates to the incremental stock based compensation expense recognized last year.
IPO condition.
Excluding this one time impact operating expenses decreased $1 $2 million year over year, driven by a few offsetting factors.
We had higher personnel related costs, reflecting increased headcount, including from RBI acquisition in January effectively offset by lower variable compensation costs, and FX stays mobility year over year.
As noted in the prior quarter. We also are seeing higher marketing Genie and facility expenses of activity impacted by Covid returned to more normal operations. This year.
These increases were more than offset by the impact of a one time insurance recovery received in the current year.
As mentioned last quarter, we implemented a series of cost reduction efforts to adjust the current business.
And we continue to focus our attention on driving greater efficiencies in our operation.
Adjusted EBITDA was one 7 million in Q3.
On a constant currency basis, adjusted EBITDA was approximately breakeven due to the favorable impact of FX on operating expenses, primarily from the Euro Israeli shekel in British pounds.
Moving to liquidity.
Uses of cash in the quarter included the majority of the remaining cash consideration paid for our acquisition of <unk> as well as continued share repurchases.
Free cash flow, which we define as cash provided from operating activities less capex and capitalized software costs and the net use of cash in the period approximately $16 million.
This was primarily driven by lower profitability and the timing of cash received.
Payment around period ends.
I point out that when you look at the balance sheet, you announced the investment in marketable securities balances in both the short and long term assets totaling $207 million.
In total we ended the quarter with $345 million of cash cash equivalents and investments on the balance sheet.
236 million of long term convertible debt.
Lastly, we announced previously on February 28, our board authorized a $30 million share repurchase program.
For October 31, we have repurchased approximately five 8 million shares for a total of $27 $8 million, including commission with remaining availability under the program of $2 $2 million.
Now turning to our outlook.
As discussed today and in prior quarters, the volatility of demand we've seen this year ongoing.
And continued uncertainty and a more cautious approach.
With that context, we are providing the following guidance.
For Q4, we expect that gross profit of $57 million $60 million, we expect adjusted EBITDA of $4 million 6 million for full year 2022, we are increasing our expectation that gross profit and adjusted EBITDA by at least $232 5 million and 23.
$2 million respectively.
Yeah.
This guidance assumes no further material changes to macro conditions.
Now I'll turn it back to the operator for Q&A.
Thank you well now begin the question and answers I had asked.
To ask a question you May Press Star then one on your thoughts on the phone.
Speakerphone, please that the brands that before pressing the keys.
Your question. Please press Star then two.
Tom will pause momentarily to assemble the roster.
First question will be from Ralph Sandler Barclays. Please go ahead.
Yeah.
Mr. Sandler is your line on mute.
Alright, well move onto our next question will be from Laura Martin Needham. Please go ahead.
Hi can you hear me okay.
Yes, Hi, Laura.
Hi.
Paul.
So net retention of about 80% is pretty low and your competitor.
Reported that there was that $12 million in the quarter, Gary <unk> new business.
Im wondering if you are.
Clients to your primary competitor.
Okay, Let me take that Kate Thanks for that question. So if you look at <unk>.
New business actually our new business was 30% higher than the competitor pool.
For Q3, so we reported $28 million.
And what we are talking about when we talk about wins, we're talking really about major publisher wins.
I would say that in aggregate on an annual basis, we'd probably be moved over to our marketplace.
Well north of $100 million of.
Business and these are names like daily Mail, obviously top name Fox and others.
Hey, RJ. This is Jason I'll, just add on that to give some color to that 81%, Laura we actually added page views or impressions or primary supply metrics net of any churn. So we grew that on a same store sales basis year over year. So there really wasn't meaningful churn.
It was really all in the demand and the average CPC paid by advertisers and sticky said in his.
Prepared remarks, 20% plus down year over year on just pricing and you're talking about 81% because we did grow the actual the actual supply.
Net of any churn. We also grew our through our technology, our click through rate.
We grew our clicks in both in both ways, but with pricing that was down year over year.
Okay.
All right.
Parameters that we highlighted in the quality vein.
Leadership position, we highlighted some of the major markets position make sure also look at the number of impressions, we have a record number of impressions on when we talk about when does that massive design win long term and very good deals for us.
Okay can we talk about Keystone.
Yeah. This is rob.
Yes.
Great.
So Keystone sounds to me like it's highly customized in order to help companies digitize their backend.
The company is different and they're going to want a lot of sort of and if I may.
Maintenance cap to understand their business is Keystone really a business that is scalable the way your core business is where you can just build a single platform and suddenly everybody plugs in.
Or is there going to be a lot more employees.
And.
By you guys and the margins ever be as high as your core business.
Yes, so it shares a lot of the and thanks Laura.
Question It shares a lot of the fundamental attributes of our core business because as I said in there.
On the call, we do leverage a lot of the core product and technology for for Keystone and so we know how to work with these pulp shares we've been doing this for.
Almost 15 years.
With many of them and.
Again is it leverages a lot of our core abilities, but human and technology.
<unk> said this is a new type of business. It is a SaaS business until the the level or the interaction. They expected we expect to provide this is <expletive>.
And.
In the long term our bet with this is that it really takes us one step above.
In terms of the strategic relationship that we have with that.
With these partners. So we think it's a good investment on it.
Okay, and finally, Microsoft could you guys update us on what's going on with Microsoft.
Yes.
So generally we don't talk about.
David We don't talk about specific customers, but Microsoft remains a super large partner a very important part in our path.
We're very excited about the progress, they're making generally on the advertising side and this bodes well for a partnership with them.
Thanks very much thank you.
Thank you next question will be from Ross Sandler Barclays. Please go ahead.
Hey can you hear me this time guys.
Hey, Ross.
Alrighty Okay.
Do we think about framing 2023 growth at this point I mean, we're seeing what's happening broadly in the industry, but how are you guys thinking about it as we head into next year and then.
Your own.
The comment you made about.
Keystone early partners seeing 30% improvement in engagement. It was pretty interesting is that AD engagement increase or is that like overall viewership.
Increasing 30% could you just unpack a little bit more about what's driving that and what you meant there. Thanks a lot.
I think maybe the first question on Hayward.
So we're not giving specific guidance for 2003, but we are very focused on profitability and cash flow generation for next year.
So we are cautiously guiding up for Q4, I think we are going to see the ability to leverage the massive supply wings again highlighted the scale of them. So as time goes by and we optimize further and improve the performance of these deals. This is long term supply that you already have I think.
That's going to allow us to continue to grow and what we need to do next year is really to take a share of wallet and I think also the demand. Thanks, Paul is the supply. So when you have these massive supply win that highlighted many of the advertisers also calling they wanted to be on besides these are sites that would be called 10.
<unk> or <unk> in every market because every market. So we feel pretty good about the ability even.
Even in a rough economic environment to just take bigger share of wallet. This is also why we are accelerating growth with enterprise brands. So we have a very strong performance business, but we're also doing them off to be able to access more existing budget So enterprise Brian .
Hey, Ross here around here I'll take the second question.
About Keystone So first of all the 30 plus percent.
I mentioned is the number that's being reported to us by the design partners on the improvement of the user engagement they are seeing on <unk>.
Keystone implemented placements on their on their properties versus the baseline they had before just to.
Just to try to use that metaphor here.
Way and they use it pre Keystone the way they use their real estate is by making largely manually Daniel decisions, which apply to pretty much all their users. So it's almost like a.
Say, a spotify, where once a week they choose.
On that everyone can listen to and that's it and that's the that's the sell in was recommended to everyone.
They don't make a personalization and optimization on those individual for individual users so with Keystone, we take those St placements and we're now.
Personalizing and optimizing it but the way we do so well in the news feed itself and so thats how they are seeing the increase in user engagement and this is not on their AD spots, but rather on the other the other business kpis that they are trying to track, whether it's internal e-commerce source subscriptions or.
Reducing churn.
This is.
Those kpis, where we can increase their engagement.
Thank you next question will be from Aaron Boone JMP Securities. Please go ahead.
Good morning, Thanks, so much for taking my questions.
Just as we think about modeling can you guys double click on take rates and just talk about how we should think about that near term understood. The macro is difficult predicting demand, but is there is there just directionally how should we start to think about take rates as being stable is starting to improve or what direction.
Sure.
Okay.
Yeah.
Okay.
Okay.
Yeah.
Sorry.
Given our given our long answer on mute there. Thanks.
Yes.
Sure thing Thanks, Andrew it's Jason.
We've spoken to before.
When we entered deals we refocus on the ex Tac dollars not not necessary to take rates, but obviously, we gave some color last quarter and this quarter on the call just on some of the some of the factors that impact our overall take rate.
Obviously, one of them always going to be mix of just what types and sizes and geographies of partners, we're generating more of less revenue from in a period and then obviously the.
The demand impact is certainly the biggest the biggest driver on our on our margin change this year of course.
A bunch of our a bunch of our.
Our partnerships are variable rates that are that are based on.
And impacted negatively by the negative macro trends and the lower demand and lower yields we're seeing from it now there is obviously some in our control of course as well we've added a lot of quality good supply in these things in our history take a few quarters to ramp up and optimize and scale and we've done that in the past routinely.
And so there is certainly some in our control.
Improving and obviously some of that's also just going to be macro driven as well, we don't see rates going.
Significantly lower or higher.
Next couple of quarters.
That's something we guide too of course, but we need to.
To help you with your modeling I would say, even though we don't expect them to go materially lower than where they are right now.
And I would just add Andrew too that when you look at the RPM composition.
Sort of CPR, we still saw improvements year over year.
In Q3, and we talked a lot about the supply, but the interesting thing here is that the demand in many of the advertising just need to be on those.
Market maker side. So we expect that anticipated it takes time to ramp up some of these deals but it also brings a lot of new advertisers to the marketplace that we've talked about that phenomenon could better blanket the more demand, we will get into it and because of those massive supply.
Much more demand that wants to be as Pablo Hall marketplace, not just on the new side.
So it's going to create positive dynamics and be able to leverage the algorithmic improvement that we still see.
Into a much larger scale.
So we're not we're not building on any improvement on pricing in the industry in the short to midterm.
And then I guess just a bigger picture question for me is just thinking about how do you guys hardened demand like what do you guys need to do to create more truly always on budgets that are on the platform.
I'll just I'll leave a broad open ended question. Thanks, so much.
Thank you.
I will repeat a little bit I think I think they're creating exclusive huge supply base attract the demand I mean advertisers want to be on those on those.
Big site. So it doesn't only help impressions, which we had to record levels and as I said, we ended about north of $100 million of new business, that's coming from competition, but also that attract a much larger number of advertisers.
Our growth into maybe optical header bidding video intelligence is also allowing us to be much more attractive and relevant school enterprise brand budgets and also there by the way, but very much focused on.
Today, they are looking for additional measurable outcomes and we see good traction with that so that's why we're cautious.
Even within the current environment.
We'll continue to execute and be very focused on the core business.
And we will be able to see the growth coming from these growth of supply that's bringing in more demand that's making the marketplace ball.
More attractive.
And enter your own here, maybe just to add one thing about that as we mentioned on the call.
Do have demand.
Great.
Near 100% and so we have the demand including for this much growth.
And the new partnerships this really is a.
Same thing.
Due to the macro.
Thank you again.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question will be from.
Jerry.
Evercore ISI. Please go ahead.
Okay. Thank you David Please talk about how you're thinking.
Specifically talking about cost management next year I know you comment that the focus is going to be on profitability and cash flow generation, which makes sense.
Specifically are you thinking about.
Thank you.
Hi, Ashwin.
If you recall I mean, we started I mean already cautioning because they are a bit on the outlook in March.
<unk> of this year. So when we saw some weakness in Europe . So we started already taking actions internally since march with even more cost reduction more concerted one in.
In July and right now, we're focusing on a few things today.
Development center into down there.
More resources to bear we're generally looking at shifting.
Sort of resources to it.
Lower cost areas.
<unk> investments in automating processes more self serve.
And we're looking at generally where are the opportunities in terms of integrating consolidating so we accelerated integration Dolby guy into our core and we accelerated some things with their mental so we're we're very focused on all the operational things that we can we can control.
So these are I would say the main the main areas.
Okay. Thank you and then Jason.
How should we think about your guidance.
For the quarter in Canada.
How much conservatism, maybe baked into it.
And what sort of.
Okay quarter get to you know what.
Thanks.
Sure Yeah. So I mean, let me just start maybe just with what we've kind of seen in the in the year.
Here in the quarter and process to frame that a little bit.
So obviously we've talked a.
We've talked early in the year, but the large step down in demand that Republic are really.
At the end of Q1, and our biggest one is that we've seen where in Q2, we haven't seen any kind of change in demand quite as meaningful since then as far as budget cancellations, which were which were the first in Europe , and then maybe more in U S.
After that.
For various macro reason.
Obviously FX has been a headwind all year as you know 60% of our businesses outside U S.
August and September for more of what I'll call.
Relative stability, I guess compared to compared to H, one and we've seen that continue into the early part of Q4 as well.
I think a few things to say why one is just the.
You're just talking about diversity of advertisers, we have obviously vertical but also tightened a lot of our a lot of our performance marketers have taken on their budgets have been a little bit more resilience.
Clearly in the U S.
The last couple of months.
And they've taken a bigger portion of our advertiser mix, which has been a little bit more stable.
We've also just seeing positive signs.
We're cautiously optimistic I guess from both U S and Europe in the West.
The last month or two.
<unk>, Germany, which is our second largest market we've talked about and.
With hit as hard as anyone.
But the demand headwinds this year so.
It gives it leaves us with some cautious optimism.
And you're expecting a more normal seasonal lift in the back half of Q4.
I see all the all of these quality supply when they are talking about just scaling into them.
<unk>.
As assumed in our guidance I would summarize it with.
We're using October run rate October FX rates.
We're cautiously optimistic on the on the seasonal lift in the back half of the quarter, which is which are which is typically our strongest time of the year.
And we expect continued scaling and performance of our new supply and of course, there's been no material deterioration in the macro conditions. So hope.
Hope that gives some color.
I just wanted to add.
On your cost on your costs when I mean, we talked about $50 million reduction was this year versus our plan.
We are obviously in final stages.
Budgeting 2023.
I think we are.
Prioritizing and we're looking at.
Hey, all.
All of the cost in terms of how the outlook is for 'twenty, three and we will.
Do whatever is necessary to really ensure profitability.
Yeah.
Okay. Thanks, David.
Thank you.
Concludes our question and answer session now I'll turn the call back over to Mr. Yolanda Lai for closing remarks. Please go ahead.
Thanks, operator, and thank you all for joining US today for Q3 earnings we are pleased with beating our guidance for Q3 and raising our full year guidance. Despite the tough macro conditions. This quarter continue to record year of winning significant new long term partnerships with some of the largest most premium publishers globally, which gives me the confidence that our superior.
Technology and strong commitment to our partners will pay offs and stronger growth and profitability. Thanks for your time and looking forward to updating you here next quarter.
Thank you that concludes our conference. Thank you for attending today's presentation you may now disconnect.
Okay.